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The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by jurisdiction, and the information on this blog may not apply to every reader. You should not take, or refrain from taking, any legal action based upon the information contained on this blog without first seeking professional counsel.

The plaintiff on-line consumer products reviewer sued the defendant information-technology firm after the plaintiff’s site kept malfunctioning. The plaintiff sued for breach of the parties’ written consulting agreement and joined claims for wilfull and wanton conduct and fraudulent concealment.

The plaintiff alleged that defendant’s negligence in installing and maintaining the site resulted in decreased customer traffic resulting in lost revenue. The defendant moved to dismiss all claims except for the breach of contract count.

Result: Motion granted.

Reasons:

The Court rejected plaintiff’s breach of warranty claim failed because it was premised on a warranty – to comply with the standard of care of an experienced IT company – that didn’t exist in the parties’ contract.

In Illinois, an express warranty is contractual in nature and the specific warranty text will govern the parties rights and duties. Here, the consulting contract contained broad disclaimers of express and implied warranties as well as an integration clause.

The Court struck the plaintiff’s negligence and willful and wanton counts based on the economic loss rule. The economic-loss doctrine prevents a party from suing in tort to recover economic damages that are based on a breach of contract.

So, if a contract involving a defective product exists, and the plaintiff alleges that the product defect caused disappointed commercial expectations, the plaintiff’s remedy lies in breach of contract; not in negligence or in another tort theory.

The Court found that the a contract clearly governed the parties’ relationship and the plaintiff’s claimed damages to its on-line presence, goodwill, reputation and its brand were purely intangible and economic in nature.

An exception to the economic loss rule involves an action alleging negligent misrepresentation. This exception applies where a defendant is “in the business of supplying information for the guidance of others in their business transactions.” Other economic loss exceptions include the fraud and sudden and dangerous occurrence exceptions.

Here, the negligent misrepresentation exception didn’t apply. The defendant was hired to provide a product (software) and services (tech assistance) – not information (this in spite of the ironic “information-technology” title).

Since the contract’s primary purpose was for the defendant to supply software and technical services to the plaintiff, the negligent misrepresentation exception wasn’t triggered. Any information provided by the defendant was purely tangential or “secondary” to the main purpose of the contract.

The Court also nixed the plaintiff’s “extra-contractual” duty argument: that defendant owed a duty of care outside the scope of the written contract. The only situations that an extra-contractual duty applies are in professional malpractice suits (e.g., a legal malpractice case) where the defendant owes a fiduciary duty to a comparatively vulnerable plaintiff.

The Court noted that there was no case-sanctioned practice or custom of allowing professional malpractice claims against IT developers and no law that saddled them with fiduciary duties to their customers.

Afterwords:

– Warranty disclaimers are valid and enforced so long as they’re clear and conspicuous;

– The economic loss rule bars tort claims against a defendant who provides a mix of goods and information if the information is secondary to the supplier of goods or services.

In July 2013, the Third District appeals court affirmed dismissal of a law firm’s (Firm) negligence suit against a bank that charged back the firm’s account after a $350,000 check deposited by the Firm turned out to be counterfeit. Rejecting the Firm’s negligence claim, the Court found that the terms of the parties’ account agreement and the specific provisions of UCC Article 4 (governing banks’ check handling practices) trumped any common law duties owed by the bank.

In Dixon, Laukitis and Downing v. Busey Bank, 2013 IL App (3d) 120832, the plaintiff Firm deposited a $350,000 check into its account at defendant bank. The bank provisionally credited the Firm’s account in the amount of the deposit. But before the check was finally paid, the firm made multiple withdrawals of nearly $300,000. A few days later, when the check turned out to be counterfeit, it was returned uncollectible and the bank charged back the Firm’s account. The Firm sued, alleging the bank breached its duty of care by failing to recognize and alert the Firm of the suspicious check. The trial court granted the bank’s motion to dismiss.

In dismissing the Firm’s negligence suit, the Court cited a slew of statutory and common law rules which govern both the relationship between a bank and a customer and a bank’s check handling practices. The key rules relied on by the Court:

–The UCC governs the relationship between a bank and its customers and a bank’s general check handling duties;

– If a check doesn’t settle (isn’t paid), the collecting bank has a superior right (to the owner) to a setoff of the unpaid check;

– UCC section 4-202 delineates a bank’s duties with respect to processing a check including presenting it, sending notice of dishonor or nonpayment, timely settling it and notifying a bank customer of any loss or delay within a reasonable time. UCC 4-202(a), (b)

– If a bank makes provisional settlement of a check but doesn’t receive final payment, the bank can charge back the customer’s account. UCC 4-214(a);

– A private agreement between a bank and its customer is valid as long as the terms aren’t manifestly unreasonable. UCC 4-103(a);

– The risk of loss of a check not settling is on the depositor until final settlement. UCC 2-214(a)

– The relationship between a bank and its account holder is contractual in nature and one of creditor (bank) and debtor (account holder);

– An account holder agreement between a bank and its customer creates a binding contract;

– A collecting bank owes no duty to its customer to inspect a check that is later determined to be counterfeit or to remind its customer that it bears the risk of loss before a deposited check is finally settled

¶¶10-13, 18-19.

Applying these rules in the bank’s favor, the Court noted that the bank’s supporting affidavit contained testimony that there was nothing unusual that led the bank to question the check’s legitimacy and that the bank promptly informed the Firm when the check was returned unpaid. Since the Firm failed to challenge the bank’s affidavit, and also cited no Article 4 duties or obligations to the account holder that the bank breached, the Firm’s negligence claim failed. (¶¶ 18-19)

The Court also dismissed the Firm’s negligence claim based on the economic loss rule. The parties’ relationship was based on a written contract (the account agreement) and the Firm sought to recover economic loss: namely, the $350,000 charge back from the fraudulent check. The existence of a contract between the parties spelled defeat for the Firm’s negligence suit.

Take-aways: To sue a bank and win is difficult. The UCC and common law provide an array of steep standards a plaintiff must surmount and defenses for a bank that is sued by a customer for negligence. A bank-customer account agreement and the provisions of UCC Articles 3 (negotiable instruments) and 4 (depository and collecting banks) will control over any common law duties owed to an account holder.

In hindsight, the Firm maybe should have premised its claims on specific violations of UCC Article 4 instead of general negligence allegations and also should have filed a counter-affidavit or other evidence to contest the bank officer’s statements.

The economic loss rule bars recovery in tort where the claim is essentially one for breach of contract. Lincoln Park West Condominium Association v. Mann, Gin, Ebel & Frazier, 136 Ill.2d 302, 307 (1990)(economic loss rule generally). “Economic loss” means (i) damages for inadequate value, (ii) costs of repair and replacement of the defective product, (iii) consequent loss of profits without any claim of personal injury or damage to other property or (iv) the diminution in the value of the product caused by its defect. Id.

Where a contract governs the parties’ relationship, the proper remedy for a breach is generally a breach of contract action; not a negligence claim. A crude example: plaintiff enters into contract for defendant to supply 50 pieces of computer hardware. Defendant fails to do so. Plaintiff’s remedy is a breach of contract suit; not a negligence action.

The main exceptions (meaning, situations where the economic loss rule won’t defeat a tort claim) to the economic loss rule are (1) the fraud exception: the claim is based on defendant’s fraudulent conduct; (2) the sudden or dangerous occurrence exception: plaintiff’s claim results from a calamitous event (like a flood or explosion); (3) the “extra-contractual” exception: attorneys and accountants owe clients fiduciary duties that go beyond the scope of the contract; and (4) the negligent misrepresentation exception: a tort claim will lie against a defendant who makes a negligent misrepresentation and who is in the business of providing information for the guidance of others in their business transactions.

In Stewart Title Guaranty Company v. Inspection and Valuation International, Inc., 2013 WL 5587293 (N.D.Ill. 2013), the Court found that the negligent misrepresentation exception did not apply to deficient construction management services on a hotel renovation project.

The plaintiff – assignee of mortgage lender on hotel development – sued a construction manager for negligence in failing to properly monitor the hotel development. A written contract required the construction manager to manage all aspects of the project. The plaintiff alleged the defendant failed to properly supervise the project and misrepresented the project’s status, budget issues and quality of the work.

The defendant moved to dismiss the negligent misrepresentation claim based on the economic loss rule. The defendant’s key argument was that since a written contract governed the parties’ relationship (the construction management contract), the plaintiff’s remedy was a breach of contract action; not a claim for negligence claim.

The negligent misrepresentation exception to the economic loss rule applies where (1) defendant is in business of supplying information for the guidance of others in their business dealings; (2) defendant provided information that constitutes a misrepresentation; (3) defendant supplied information for guidance in plaintiff’s business dealings. *5.

The critical question in determining whether the exception applies is whether the parties’ relationship will culminate in the creation of a tangible product. If it does, the economic loss rule will bar recovery. If it doesn’t (meaning, the end product is intangible “services”), the plaintiff may have a viable negligence claim.

The First District sided with the defendant and held that, as part of its contractual management duties, the defendant was hired to cull engineering and architectural drawings, plans and data and incorporate that information into a tangible product – namely, the renovated hotel. Any information supplied by the defendant was incidental to and merged into the building itself.

The Court rejected plaintiff’s argument that defendant was an information-producing “consultant” to the project whose main role was to “advise” the plaintiff. The Court ruled that since any information provided by defendant was incorporated into the hotel structure, any information provided was insignificant.

Comments: Where the main purpose or end result of a given contract is a palpable product – as opposed to advice giving, consulting or information – the economic loss rule will apply and defeat a tort suit. The Court does acknowledge though that in certain instances, a contract involving an architect, engineer or contractor – usually quintessential tangible product contracts – can meet the negligent misrepresentation test if the contract is purely for consulting/advising.